Question

. (20 pts) Black-Scholes-Merton Model:

The following information applies for a call on the stock of a certain company.

S=$68,    X=$70,    option life is 47 days,    risk-free rate (annualized, discrete) = 4.0%, and the stock’s return annualized standard deviation = 36%. This stock pays no dividends.

1. What value does the Black-Scholes model estimate for a European-style call and a European-style put on this stock?

NOTE: Due to the time-constraints and with a take-at-home exam, YOU SHOULD USE the Black-Scholes-Merton Option Pricing Spreadsheet to solve this problem. So, the question is really whether you can plug into the model correctly. You should plug in the correct continuously compounded risk-free rate into the option pricing model. Please just copy in the below cells from the spreadsheet (replacing the placeholder cells below) with the correct inputs from the above problem statement:

AGAIN, I STRESS THAT YOU SHOULD NOT TAKE THE TIME TO SOLVE BY HAND HERE, BUT USE THE OPTION PRICING SPREADSHEET.

Inputs:
Asset price (S0)
Exercise price (X)
Time to expiration (T)
Standard deviation (s)
Risk-free rate (rc)
Dividends:

Your Call Price Answer from the pricing spreadsheet: ___________

Your Put Price Answer from the pricing spreadsheet: __________

Answer 1

Your Call Price Answer from the pricing spreadsheet: $2.78

Your Put Price Answer from the pricing spreadsheet: $4.42